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GDPNow vs Nowcast: When Will Hurricane Adjustments Take Place?

On Friday, GDPNow and the FRBNY Nowcast both posted third-quarter GDP estimates. GDPNow stands at 3.0%. The Nowcast is at 2.1%. Inquiring minds may be wondering what Hurricanes Harvey and Irma will do to their models. First, let’s review the latest forecasts.

GDPNow Forecast: 3.0 Percent — September 8, 2017

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 3.0 percent on September 8, up from 2.9 percent on September 6. The forecast of the contribution of inventory investment to third-quarter real GDP growth increased from 0.87 percentage points to 0.94 percentage points after this morning’s wholesale trade report from the U.S. Census Bureau.

FRBNY Nowcast Forecast: 2.1 Percent — September 8, 2017

The New York Fed Staff Nowcast stands at 2.1% for 2017:Q3 and 2.6% for 2017:Q4.

News from this week’s data releases decreased the nowcasts for both quarters by 0.1 percentage point.

Negative news from lower than expected imports and exports data accounted for most of the decrease.

When Will Hurricane Adjustments Take Place?

The answer is no adjustments per se will be made to the models.

Here is a Q&A between Pat Higgins, creator of GDPNow and me.

Mish Question to Pat Higgins

Hi Pat
Can I safely presume your model will not change because of hurricanes? Rather the data that comes in will impact the model, whatever it may be.

Do you have a personal opinion that you can share about the likely impacts of these hurricanes?

Thanks
Mish

Pat Higgins Reply to Mish

Hi Mish – your presumption is correct. GDPNow will only be impacted by the hurricanes to the extent they impact monthly data used by the model. And no adjustments are being made to the model’s forecasts of the yet-to-be released source data because of the hurricanes.

On your second question, I’m afraid I can’t be of much help since the impact of weather-related events on GDP is outside of the scope of GDPNow.

Best regards,
Pat

GDP Will Take a Hit

Without a doubt, third quarter GDP will take a hit. Businesses were closed and people lost their jobs, even if only temporary that a lot of economic activity that did not take place.

Will models will exaggerate the effect by carrying the results too far into the future? That’s possible, but it’s also possible the economy was peaking right as the hurricanes hit.

As I stated in a previous article, the Hurricanes give the Fed and president Tump perfect scapegoats to blame if a recession hits. A recession was long overdue anyway.

These cross currents, as well as artificial increases in demand for automobiles wiped out in Hurricane Harvey, are all in play.

For now, it’s best just to watch the data over the next few months, while also watching how the GDP models react to it.

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28 thoughts on “GDPNow vs Nowcast: When Will Hurricane Adjustments Take Place?”

It’s helpful to see the distinction between a flow and a status. Think of the difference between your income and your wealth. Your income measures a flow of money to you, and your wealth measures the status of your bank account, etc. GDP measures the flow, not the status. As an analogy, suppose you had no insurance, and your house burned down, forcing you to get a second job. Your wealth has a major decline, but your income goes up. Does higher income mean you are better off? Hardly.

While individuals may have insurance in the case of a hurricane, the country as a whole loses wealth when a hurricane hits. How does it affect GDP? In the short term, the impact on GDP of a hurricane is negative due to people not being able to work, but once the rebuilding begins, there is a positive impact on GDP. That, however, does not change the fact that the country as a whole loses wealth in the process. Is the country better off? Hardly.

At most, all GDP (purports to) measure is one half of the flow. Which I’m sure has some uses, but it is in no way at all representative of some form of public “good.” Hence is in no way something that should be used as a measure for “how well” “the economy” is performing.

A measure of “net flow”, some measure of created minus destroyed, may be relevant as a measure of economic well being. But it’s a pretty tough one to measure with even the kind of pretend accuracy that seems to suffice for GDP.

Never mind “measuring” “economic well being” in and of itself, is nothing but an evil. As the only possible reason for doing so, is to use whatever flawed metric is proposed, as an excuse to meddle. Which is why The Founders, wisely, did not include any such charlatanisms amongst government’s enumerated powers.

Throw in news from my brother who owns a winter home in the Tampa area… he could not find any company to install hurricane protection, plywood, ect, and neither could anyone else in his community. They were way too busy. Most did not even answer their phones. There are a bunch of houses that are wide open for easy damage. I wonder how long it’ll take for the insurance companies to arrange repairs? Ain’t lookin’ real good.

For now the west coast surge is actually negative…Irma is blowing the water out to sea, not sure if that is due to change. The keys did not have exceptionally high water levels either, but I guess there will be wave damage in places.

Federal flood insurance program is $26 billion in debt, and Congress needs to find $600 billion in debt ceiling / new taxes just to keep their empty promises they made before the hurricanes.

Congress will try to put a happy media spin on it, but they are going to default on more and more promises. Obamacare costs ended government spending as we know it (and Uncle Sam’s checkbook was in bad shape even before Obamacare ended it)

If Yellowstone blew up, they wouldn’t allow GDP to go into negative territory. They are rigidly commited to the belief that positive beliefs drive economic growth. I was almost going to call it a theory. But that would assume some scientific basic. This is a religious belief.

There is another blog that is asking if the US can afford to rebuild (without cutting corners)…

Congress hit the debt limit already, and next fiscal year’s spending deficit is about $600 billion… they have to argue about funding $600B in promises like perpetual wars and Obamacare before they can start arguing about new spending like hurricane cleanup costs.

Something like 70% of Americans have no rainy day fund — they don’t have $1000 in savings to fund an unforeseen expense, like a health issue, car accident, or (ahem) hurricane damage.

Despite living in hurricane alley, a disturbing number of home squatters in FL and TX did not buy flood insurance. It might not matter since the government flood insurance program is $26 billion in debt already (and Congress would have to appropriate more from what monies?). If a person has little/no savings, and no flood insurance, they are not going to rebuild — they are going struggle just to get by.

If Katrina and Sandy are any indication, a lot of the initial knee-jerk rebuilding is going to be fraudulent… over charging for very sloppy construction. A lot of repairs had to be torn down and redone 6-9 months later.

Not that the savings rate was very high from 1980-2000, but Bernanke’s war on savings means the US probably can’t afford to rebuild after these hurricanes.

Lots of debt (the servicing costs will eat into future economic growth), and lots of half measures (building much smaller dwellings and/or moving to lower cost regions). People with little savings don’t have any other choice.

I think that the actual impact of hurricanes will be positive to growth. It will require a lot of rebuilding. The $ will come from investments of the insurance companies and flow into actual employment.

The difference with natural disasters is where the money comes from to fund the rebuilding. The majority of the money is coming from private sector sources. It was in the reserves of insurance companies supporting 0% interest rates and overvalued asset prices.

It seem possible that despite the unwanted devastation, the end results may be positive as things are rebuilt better than the destroyed structures.

Growth comes from more people employed and investment by the private sector. Both happen now. Investment always lowers savings. Money is unproductive when it’s chasing financial bubbles. When private sector money is deployed in the economy and leads to more employment and better infrastructure, you have economic growth.

It is NOT spending money just to get to where we are as we have a new reality that includes the destruction. Stopping the destruction would be better but we can’t do that and that is the new reality.

hurricane relief will be funded by the fed discreetly printing up a trillion (or 2)and funneling the cash to the treasury along with another couple trillion to fund the gov’t through 2018 aka roughly 3-4 trillion needs to be printed NOW to fund big gov’t for at least into 2019

In the long run, you are obviously right. But as long as there are some people left in the US with something left to steal, robbing them can still be a lucrative venture for the robbers.

Which is all printing, “lender of last resort”, “combating deflation,” “QE” and all of the rest of Central Banking really is: Robbing those further from the Central Bank, to enrich those closer to it. Only obfuscated very, very lightly.

Such that those so enriched, can afford to further cement their position amongst their captive, well indoctrinated public, by spending a fraction of the loot on “showing that they care” for the ones affected by the disaster. Who will then believe even stronger that if it wasn’t for Big Massa in Washington and his “financial system”, they would somehow have it even worse if they weren’t systematically robbed.

Eventually, as in Zimbabwe, the thieves will run out of other peoiple’s money to steal. But until they do, the game can go on. For as long as the public remains their usual pliable, well indoctrinated sycophantic selves. Always, just as told to, willing to give Massa every benefit of every doubt. Even when there is no doubt.

I wouldn’t think that Hurricane Harvey and Irma will affect GDP in a very meaningful way. I would guess a slight reduction in GDP for the third and fourth quarters; perhaps 0.5% less on an annual basis. This will be recouped in 2018 over the course of the year.

These events won’t affect GDP much on a long term basis.

Of course, those in the disaster areas will be affected personally, to varying degrees. My condolences for any loss of life.

The homeowners without insurance will suffer. In particular, many foreign homeowners won’t qualify for relief, as they are not US citizens. Hopefully, they have insurance. Though it doesn’t sound like many do.

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